Morningstar | Ralph Lauren Exits 2019 on Solid Footing, but Margin Expansion Sustainability Remains a Concern
We don’t plan a change to our $107 fair value estimate for narrow-moat Ralph Lauren, following in line fiscal 2019 results. For the year, sales grew 2% on a 61.7% adjusted gross margin and 11.5% adjusted operating margin versus our 2.4%, 61.5%, and 11.3% forecasts, respectively. Additionally, management’s initial fiscal 2020 constant currency sales and profit guidance generally aligns with our low-single-digit and flat operating margin outlook. However, even after accounting for the mid-single-digit retraction in shares, we think investors should await a more favorable risk/reward opportunity before building a position.Ralph Lauren continues to make progress on its five-year plan (outlined in 2018) by limiting off-price channels, lapping the relaunch of the U.S. digital business, and improving product assortment. Highlighting these efforts, direct-to-consumer AUR increased 8% and digital sales jumped 11% in the year. Additionally, we have a favorable view of the firm’s efforts to support the brand intangible assets we think underlie its narrow economic moat with increased marketing investments, with a long-term goal to reach 5% of sales (from 4.3% of sales in fiscal 2019) as these investments translate into higher AUR sales and brand engagement.
We remain skeptical of management’s ambitions to reach a mid-teens operating margin target by fiscal 2023. Ralph Lauren competes in an industry with low switching costs and fickle consumer tastes (as evidenced by the fashion miss in the quarter, which the firm qualitatively suggested crimped gross margin) and see inventory growth (up 7% for the year) outpacing sales as an unfavorable metric for evaluating the sustainability of gross margin expansion. As such, we expect these intense competitive forces to constrain its ability to expand margins meaningfully over the next decade--with our forecast calling for adjusted operating margin expanding to just 12% in 2028 from 11.5% in fiscal 2019.
Ralph Lauren designs, markets, and distributes lifestyle products, including apparel, accessories, home furnishings, and other licensed product categories. The company's brand names include Ralph Lauren, Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, Chaps, and Club Monaco, among others. The company sells directly to customers via its retail stores, concession-based shop-within-shops, and through its own digital commerce sites; while its international licensing partners operated Ralph Lauren stores, Ralph Lauren concession shops, and Club Monaco stores and shops. The company has three segments: North America ; Europe; and Asia.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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